Abstract

This article reviews the concepts of marketability and liquidity, analyzes the different methodologies developed for estimating the percentage of discount, and identifies the main research lines. Literature recognizes the existence of the discount for lack of marketability (DLOM), and it has been widely analyzed. The DLOM recognizes the drop in a company's value that occurs if sellers want to attract potential buyers who will bear the extra risk of an illiquidity investment. Two methods are widely accepted to quantify the DLOM: 1. restricted stock approach (RSA), and 2. initial public offering approach (IPOA). Two other approaches, however, complete the array of empirical models: valuation multiplier approach (VMA) and other empirical approaches (OEA). Experts tend to apply a DLOM, and they look for benchmarks and prior research to help them to make decisions. Nonetheless, each valuation, of course, should be analyzed on the basis of the individual facts and circumstances. The common practice of benchmarking should be done with caution, because the extrapolation of the percentages of discount requires that the appraiser or valuator take into account three basic factors: 1. the methodology used to arrive at the DLOM, 2. the type of financial assets, and 3. the time period to which data relates.